Indemnity Clauses and Anti-Indemnity Legislation
I. Purpose and Enforceability of Indemnity Clauses
Indemnification is an equitable doctrine that attempts to shift the burden of a judgment from one party to another. The indemnitor is the party holding the other party harmless, the indemnitee. Indemnification is different from the doctrine of contribution, which attempts to apportion liability among a number of jointly liable parties who share common liability to an injured party. Therefore, while contribution distributes the loss among parties, each bearing its own pro-rata share, indemnification transfers the entire loss from one party to another.
One of the primary risk shifting devices in any construction contract can be the indemnification provisions. These provisions attempt to allocate possible risks to those who should more appropriately bear responsibility based on the duties set forth under the parties’ respective contracts. Usually, indemnification clauses attempt to require one party to pay the damages and costs (including legal costs and expenses) incurred by another party. The common law (case law) of most states impose limitations on the enforceability of certain risk transfers, like indemnity agreements. Courts will generally only enforce these agreements if they are convinced it will achieve the result intended by the parties. In addition to this common law, because of the significance of these agreements in the construction context, most states enacted statutes that limit or prohibit the enforceability of certain indemnification agreements, especially in the construction industry context.
II. Sample Indemnity Clauses
Two good examples of indemnity provisions can be found in the AIA standard form documents, and the ConsensusDOCS forms.
AIA Document A201 “General Conditions of the Contract for Construction,” §3.18, INDEMNIFICATION, provides as follows:
§ 3.18.1 To the fullest extent permitted by law the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants, and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity that would otherwise exist as to a party or person described in this Section 3.18.
§ 3.18.2 In claims against any person or entity indemnified under this Section 3.18 by an employee of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under Section 3.18.1 shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or a Subcontractor under workers’ compensation acts, disability benefit acts or other employee benefit acts.
ConsensusDOCS 200 “Standard Agreement and General Conditions Between Owner and Constructor,” Article 10, INDEMNITY, INSURANCE AND BONDS, provides as follows:
10.1.1 To the fullest extent permitted by law, the Constructor shall indemnify and hold harmless the Owner, the Owner’s officers, directors, members, consultants, agents and employees, the Design Professional, and Others (the Indemnitees) from all claims for bodily injury and property damage, other than to the Work itself and other property insured, including reasonable attorney’s fees, costs and expenses, that may arise from the performance of the work, but only to the extent caused by the negligent acts or omissions of the Constructor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Constructor shall be entitled to reimbursement of any defense costs paid above the Constructor’s percentage of liability for the underlying claim to the extent provided for by the subsection below.
10.1.2 To the fullest extent permitted by law, the Owner shall indemnify and hold harmless the Constructor, its officers, directors, members, consultants, agents, and employees, Subcontractors or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable from all claims for bodily injury and property damage, other than property insured, including reasonable attorneys fees, costs and expenses, that may arise from the performance of work by the Owner, the Design Professional, or Others, but only to the extent caused by the negligent acts or omissions of the Owner, the Design Professional, or Others. The Owner shall be entitled to reimbursement of any defense costs paid above the Owner’s percentage of liability for the underlying claim to the extent provided for by the subsection above.
10.1.3 NO LIMITATION ON LIABILITY In any and all claims against the Indemnitees by any employee of the Constructor, anyone directly or indirectly employed by the Constructor or anyone for whose acts the Constructor may be liable, the indemnification obligation shall not be limited in any way by any limitation on the amount or type of damages, compensation or benefits payable by or for the Constructor under workers’ compensation acts, disability benefit acts or other employment benefit acts.
The ConsensusDOCS’ indemnity provisions are significantly different from the provisions in the AIA A201. The primary difference is that the AIA A201 is a more broad form of indemnity provision. The nature and significance of this difference will be described more fully below. Additionally, the ConsensusDOCS have a “mutual” indemnity provision, and also allow either party to recover their defense costs to the extent they exceed their respectively apportioned percentages of liability.
III. Different types of Indemnity Provisions and Their Enforceability
Indemnity provisions can take on many different forms, but typically fall into one of three categories, generally described as: broad, intermediate, and limited form. Generally, the different forms of indemnity are characterized as follows:
Under this form, the indemnitor agrees to hold harmless the indemnitee for all liability, regardless of fault. Even if the indemnitee is solely at fault, the indemnitor still has the obligation to indemnify. The obligation to indemnify the other party is triggered if the indemnitor is at all responsible for a claim or damages, and includes the obligation to indemnify even if the indemnitee is solely negligent. These clauses effectively shift the entire risk of loss from one party to the other. This form typically uses this type of language: “Shall indemnify for claims arising out of…whether caused in whole or in part by the negligence of the Indemnitee…It is specifically understood that this indemnity shall be interpreted as indemnifying the Indemnitee from its own sole and/or partial negligence.” These types of indemnity provisions are generally prohibited by statutes in most states. For example, in Michigan, Mich. Comp. Laws §691.991, entitled “Building Industry; certain contracts for indemnification void”, provides:
A covenant, promise, agreement or understanding in, or in connection with or collateral to, a contract or agreement relative to the construction, alteration, repair or maintenance of a building, structure, appurtenance and appliance, including moving, demolition and excavating connected therewith, purporting to indemnify the promisee against liability for damages arising out of bodily injury to persons or damage to property caused by or resulting from the sole negligence of the promisee or indemnitee, his agents or employees, is against public policy and is void and unenforceable.
Under this form, the indemnitor agrees to hold harmless the indemnitee for all liability, unless the indemnitee is 100% at fault. Any amount of fault on the part of the indemnitee obligates them to cover the entire loss. The obligation to indemnify the other party is triggered if the indemnitor is at all responsible for a claim or damages, however, includes the exception that the obligation to indemnify does not apply if the indemnitee is solely negligent. This form typically uses this type of language: “Shall indemnify…whether caused in part by the negligence of the Indemnitee…This clause is not intended to indemnify the Indemnitee for claims, damages, losses and expenses caused by the sole negligence of the Indemnitee.” As we saw above, the language of the AIA A201 form appears to follow this form of indemnity provision. About 50% of states have legislation that prohibits these types of indemnity provisions, like North Carolina N.C.G.S. §22B-1, entitled “Construction Indemnity Agreements Invalid”, which provides:
Any promise or agreement in, or in connection with, a contract or agreement relative to the design, planning, construction, alteration, repair or maintenance of a building, structure, highway, road, appurtenance or appliance, including moving, demolition and excavating connected therewith, purporting to indemnify or hold harmless the promisee, the promisee's independent contractors, agents, employees, or indemnitees against liability for damages arising out of bodily injury to persons or damage to property proximately caused by or resulting from the negligence, in whole or in part, of the promisee, its independent contractors, agents, employees, or indemnitees, is against public policy and is void and unenforceable. Nothing contained in this section shall prevent or prohibit a contract, promise or agreement whereby a promisor shall indemnify or hold harmless any promisee or the promisee's independent contractors, agents, employees or indemnitees against liability for damages resulting from the sole negligence of the promisor, its agents or employees.
Under this form, parties to the agreement are only responsible for indemnity to the extent of their own liability, on a comparative basis of fault. The obligation to indemnify the other party only extends to the extent of the indemnitor’s negligence. This form typically uses this type of language: “Shall indemnify…but only to the extent caused in whole or in part by the negligent acts or omissions of Indemnitor…under a comparative basis of fault.” The ConsensusDOCS 200 language appears to follow this form of agreement. Most states allow this form of indemnity agreement.
IV. Waiver of the Exclusivity of Workers’ Compensation
Some states prohibit an employee from bringing a tort action against their employer for injuries sustained on the job, and instead provide the employee’s exclusive remedy for recovery is the Workers’ Compensation act. As a result, a contractor who is primarily at fault for its employee’s injury may escape liability except for the small cost of workers’ compensation payments (which are usually covered by insurance). This generally forces injured parties to look to up-stream parties when they file personal injury actions. When they do, the up-stream party may be prohibited from seeking indemnity from the party actually responsible for the claim. Certain contractual provisions constitute a waiver of that limitation, and allow up-stream parties the opportunity to bring the responsible employer back into the action, fully exposed to the loss. See the AIA A201 § 3.18.2 and ConsensusDocs 200 §10.1.3.
Most states allow these “action over claims,” which usually results in a third party claim against the subcontractor/employer, if the subcontractor/employer has waived certain defenses in its contract. These clauses require the employer to waive the exclusivity defense of workers’ compensation to the action by the upstream party, potentially exposing them to unlimited damages. Since it is only a waiver of an affirmative defense to the action, and not the assumption of additional tort liability, these clauses are generally not prohibited by most states’ anti-indemnity statutes.
However, in some states, up-stream contractors are immune from this liability in tort for injuries sustained by the employee of a subcontractor (generally under the theory that it also falls under the exclusivity provision of that state’s workers’ compensation act). There are exceptions to this rule, including inherently dangerous activity (this is often deemed a non-delegable duty), when the contractor maintains control over the manner and method of work, or a claim for negligent hiring or selection of the subcontractor.
Insurance and Additional Insureds
While indemnity clauses and other risk shifting devices are essential construction contract items, unfortunately they are only as effective as the indemnitor’s financial ability to meet its obligation to the indemnitee. Contractually required insurance provides a way to back-up the indemnity provisions discussed above.
Standard Insurance Services Office, Inc. (ISO) CGL coverage form policies automatically provide coverage for “insured contracts,” which includes construction contracts containing indemnity provisions. Coverage under these provisions is commonly referred to as “contractual liability coverage,” which is a part of the broad coverage generally defined by the CGL’s insuring agreement.
II. Sample Clauses
The 2007 versions of the standard AIA form documents contain detailed insurance provisions, found in AIA Document A201 (2007), “General Conditions of the Contract for Construction,” §11 INSURANCE AND BONDS, which provides as follows:
ARTICLE 11 INSURANCE AND BONDS
§ 11.1 CONTRACTOR’S LIABILITY INSURANCE
§ 11.1.1 The Contractor shall purchase from and maintain in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located such insurance as will protect the Contractor from claims set forth below which may arise out of or result from the Contractor’s operations and completed operations under the Contract and for which the Contractor may be legally liable, whether such operations be by the Contractor or by a Subcontractor or by anyone directly or indirectly employed by any of them, or by anyone for whose acts any of them may be liable:
.1 Claims under workers’ compensation, disability benefit and other similar employee benefit acts that are applicable to the Work to be performed;
.2 Claims for damages because of bodily injury, occupational sickness or disease, or death of the Contractor’s employees;
.3 Claims for damages because of bodily injury, sickness or disease, or death of any person other than the Contractor’s employees;
.4 Claims for damages insured by usual personal injury liability coverage;
.5 Claims for damages, other than to the Work itself, because of injury to or destruction of tangible property, including loss of use resulting therefrom;
.6 Claims for damages because of bodily injury, death of a person or property damage arising out of ownership, maintenance or use of a motor vehicle;
.7 Claims for bodily injury or property damage arising out of completed operations; and
.8 Claims involving contractual liability insurance applicable to the Contractor’s obligations under Section 3.18.
§ 11.1.2 The insurance required by Section 11.1.1 shall be written for not less than limits of liability specified in the Contract Documents or required by law, whichever coverage is greater. Coverages shall be written on an occurrence basis and shall be maintained without interruption from the date of commencement of the Work until the date of final payment and termination of any coverage required to be maintained after final payment, and, with respect to the Contractor’s completed operations coverage, until the expiration of the period for correction of Work or for such other period for maintenance of completed operations coverage as specified in the Contract Documents.
§ 11.1.3 Certificates of insurance acceptable to the Owner shall be filed with the Owner prior to commencement of the Work and thereafter upon renewal or replacement of each required policy of insurance. These certificates and the insurance policies required by this Section 11.1 shall contain a provision that coverages afforded under the policies will not be modified, canceled or allowed to expire until at least 30 days’ prior written notice has been given to the Owner. An additional certificate evidencing continuation of liability coverage, including coverage for completed operations, shall be submitted with the final Application for Payment as required by Section 9.10.2 and thereafter upon renewal or replacement of such coverage until the expiration of the time required by Section 11.1.2. Information concerning reduction of coverage on account of revised limits or claims paid under the General Aggregate, or both, shall be furnished by the Contractor with reasonable promptness.
§ 11.1.4 The Contractor shall cause the commercial liability coverage required by the Contract Documents to include (1) the Owner, the Owner’s lender(s), the Owner’s landlord, the Architect and the Architect’s Consultants as additional insureds for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s operations; and (2) the Owner as an additional insured for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s completed operations.
§ 11.3.7 WAIVERS OF SUBROGATION
The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and the subcontractors, sub- subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.
The current versions of the ConsensusDOCS also contain detailed insurance requirements, found in ConsensusDOCS 200, “Standard Agreement and General Conditions Between Owner and Constructor,” Article 10, INDEMNITY, INSURANCE AND BONDS, which state as follows:
10.2.1 Before commencing the Work and as a condition precedent to payment, the Constructor shall procure and maintain in force Workers’ Compensation Insurance, Employers’ Liability Insurance, Business Automobile Liability Insurance, and Commercial General Liability Insurance (CGL). The CGL policy shall include coverage for liability arising from premises, operations, independent contractors, products-completed operations, personal injury and advertising injury, contractual liability, and broad form property damage. The Constructor’s Employers’ Liability, Business Automobile Liability, and CGL policies shall be written with at least the following limits of liability:
* * *
10.2.2 Employers’ Liability, Business Automobile Liability and CGL coverage required under subsection 10.2.1 may be arranged under a single policy for the full limits required or by a combination of underlying policies with the balance provided by Excess or Umbrella Liability policies.
10.2.3 The Constructor shall maintain in effect all insurance coverage required under subsection 10.2.1 with insurance companies lawfully authorized to do business in the jurisdiction in which the Project is located. If the Constructor fails to obtain or maintain any insurance coverage required under this Agreement, the Owner may purchase such coverage and charge the expense to the Constructor, or terminate this Agreement.
10.2.4 The policies of insurance required under subsection 10.2.1 shall contain a provision that the coverage afforded under the policies shall not be cancelled or allowed to expire until at least thirty (30) Days’ prior written notice has been given to the Owner. The Constructor shall maintain completed operations liability insurance for one year after acceptance of the Work, Substantial Completion of the Project, or to the time required by the Contract Documents, whichever is longer. Before commencing the Work, the Constructor shall furnish the Owner with certificates evidencing the required coverage.
10.3 PROPERTY INSURANCE
10.3.3 The Owner and the Constructor waive all rights against each other and their respective employees, agents, contractors, subcontractors and sub-subcontractors, and design professionals for damages caused by risks covered by the property insurance except such rights as they may have to the proceeds of the insurance and such rights as the Constructor may have for the failure of the Owner to obtain and maintain property insurance in compliance with subsection 10.3.1.
10.3.4 To the extent of the limits of the Constructor's CGL specified in subsection 10.2.1 or [_____]__________ dollars ($[______]_________), whichever is more, the Constructor shall indemnify and hold harmless the Owner against any and all liability, claims, demands, damages, losses and expenses, including attorneys' fees, in connection with or arising out of any damage or alleged damage to any of the Owner's existing adjacent property that may arise from the performance of the Work, to the extent caused by the negligent acts or omissions of the Constructor, Subcontractor, or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable.
10.3.5 RISK OF LOSS Except to the extent a loss is covered by applicable insurance, risk of loss or damage to the Work shall be upon the Constructor until the Date of Substantial Completion, unless otherwise agreed to by the Parties.
10.4 OWNER'S INSURANCE
10.4.1 BUSINESS INCOME INSURANCE The Owner may procure and maintain insurance against loss of use of the Owner's property caused by fire or other casualty loss.
10.4.2 OWNER'S LIABILITY INSURANCE The Owner shall either self-insure or obtain and maintain its own liability insurance for protection against claims arising out of the performance of this Agreement, including without limitation, loss of use and claims, losses, and expenses arising out of the Owner's acts or omissions.
10.5 ADDITIONAL GENERAL LIABILITY COVERAGE
10.5.1 The Owner [___] shall/[_____] shall not (indicate one) require the Constructor to purchase and maintain additional liability coverage, primary to the Owner's coverage under subsection 10.4.2.
10.5.2 If required by the above subsection, the additional liability coverage required of the Constructor shall be
.1 Additional Insured. The Owner shall be named as an additional insured on the Constructor's CGL specified for operations and completed operations, but only with respect to liability for bodily injury, property damage or personal and advertising injury to the extent caused by the negligent acts or omissions of the Constructor, or those acting on the Constructor’s behalf, in the performance of the Constructor’s Work for the Owner at the Worksite.
.2 OCP. The Constructor shall provide an Owners' and Contractors' Protective Liability Insurance (“OCP”) policy with limits equal to the limits on CGL specified, or limits as otherwise required by the Owner.
Any documented additional cost in the form of a surcharge associated with procuring the additional general liability coverage in accordance with this subsection shall be paid by the Owner directly or the costs may be reimbursed by the Owner to the Constructor by increasing the Contract Price to correspond to the actual cost required to purchase and maintain the coverage. Before commencing the Work, the Constructor shall provide either a copy of the OCP policy, or a certificate and endorsement evidencing that the Owner has been named as an additional insured, as applicable.
The AIA’s additional insurance provisions under the A201 require the contractor to provide CGL coverage identifying: 1) the owner, architect and the architect’s consultants as additional insureds for claims caused in whole or part by the contractor’s negligent acts or omissions during the contractor’s operations; and 2) the owner as an additional insured for claims caused in whole or part by the contractor’s negligent acts or omissions during the contractor’s completed operations. It also requires completed operations coverage until the expiration of the period for correction of work or for such other period for maintenance of completed operations as specified in the contract documents.
Under the ConsensusDOCS, there is no default duty to provide any additional insurance coverage to any party. Instead, the parties elect whether the contractor will be required to provide additional insurance coverage by checking designated boxes. If the parties elect to require the contractor to provide additional insurance coverage, the owner is responsible for paying any additional costs incurred in obtaining the coverage. The ConsensusDOCS require completed operations coverage to be provided for at least one year after acceptance of the work, substantial completion of the project, or as required under the contract documents.
III. Important Considerations
Given the importance of insurance on construction projects, owners commonly require that contractors provide them additional insured status under the contractor’s general liability policy, and the general contractor in turn requires its subcontractors to provide it and the owner with additional insured status. This “additional insured” status is typically provided by endorsement or written amendment to the named insured’s policy.
Endorsements are subject to the policy’s exclusions and exceptions, and as with any contract claim, they are resolved through an interpretation of the contract’s terms. Therefore, claims made by additional insureds are handled just like any other contract claim, with the Court primarily interpreting the policy of insurance and any of its endorsements in order to make a determination of coverage. For this reason, it is important for up-stream parties to verify that endorsements and policies provide the coverage they believe they are getting, and down-stream parties should verify they are providing the insurance they are required to under their contact.
IV. Certificates of Insurance and Endorsements
Sometimes a certificate of insurance is provided instead of an endorsement. A certificate of insurance is not itself a valid endorsement to a policy, and generally courts find certificates alone do not create coverage. Most certificates of insurance include disclaimers that state they do not alter the terms of the underlying policy, and do not create coverage if none otherwise exists. Further, certificates of insurance typically do not detail the specifics of what coverage is provided, do not reveal the number of other additional insureds under the policy, or whether there have been claims on the policy and what available limits remain. An additional insured should always obtain the required endorsements instead of relying on certificates, as well as considering the coverage it is getting under the underlying policy.
Additional insured status is typically conferred by way of an endorsement. A review of the endorsement or other policy language is critical to verifying compliance with the contract, as the insurer’s obligation to the additional insured is governed by what the carrier agreed to do in its insurance contract with endorsements, not what the named insured agreed to do in its construction contract.
AIA A201: The Contractor shall purchase…and maintain …such insurance as will protect the Contractor from claims set forth below which may arise out of or result from the Contractor’s operations and completed operations under the Contract.
ConsensusDOCS 200 Article 10.2.1: Before commencing the Work and as a condition precedent to payment, the Constructor shall procure and maintain in force Workers’ Compensation Insurance, Employers’ Liability Insurance, Business Automobile Liability Insurance, and Commercial General Liability Insurance (CGL). The CGL policy shall include coverage for liability arising from premises, operations, independent contractors, products-completed operations, personal injury and advertising injury, contractual liability, and broad form property damage. The Constructor’s Employers’ Liability, Business Automobile Liability, and CGL policies shall be written with at least the following limits of liability: ______________
An issue typically litigated in these cases is the scope of whether the loss “arises out of” the named insured’s work. The majority of courts construe “arising out of” language very broadly, requiring coverage not just limited to vicarious liability but for liability arising out of the named insured’s work irrespective of whether the injury was caused by the named insured or the additional insured. Any activity on site by the named insured could lead to the conclusion that the claim “arose out of” their activity there. The minority view courts instead hold the phrase “arising out of” limits the additional insured’s coverage to vicarious liability for the named insured’s (the subcontractor) ongoing operations only. The important point is to ensure the proper endorsement is in play, which will determine whether losses “arising out of” the named insured’s operations are covered. It is very important to note that both the AIA and the ConsensusDOCS provisions use the “arising out of” language.
There are several additional insured endorsements promulgated by ISO. When a named insured faces repeated demands to procure additional insured coverage, they can endorse their policy with a “blanket endorsement,” which extends additional insured status to any person or company with whom the named insured has a contract requiring them to name an additional insured under its general liability policy. (CG 20 10 03 97). Additional insured status is typically limited to liability “arising out of” ongoing operations only performed by the named insured on the project specified in the construction contract. The significant role of this type of coverage is that an owner or general contractor is added automatically when the construction contract requires the provision of additional insured coverage, without need for a specific endorsement for the subject project.
ISO endorsement CG 20 10 07 04 is the most commonly used form to add a party as an additional insured for a specific project. This endorsement was much broader prior to 2004, when the endorsement was significantly revised. The 2004 versions of the standard endorsements significantly alter coverages that were in place under earlier endorsements. First, the additional insured is covered only if the liability is “caused in whole or in part” by “the acts or omissions” of the named insured. It no longer uses the “arising out of” language of earlier endorsements, and so is in conflict with both the AIA and ConsensusDOCS contract requirements. It also excludes coverage for the sole negligence of the additional insured, meaning that suits against the additional insured may not be covered, even if the named insured was wholly at fault. Since the CG 20 10 provides that the additional insured is covered only if the liability is caused “in whole or in part” by acts or omissions of the named insured, if a lawsuit only alleges fault against the additional insured, this endorsement would not provide protection. Further, there is no protection for completed operations without an additional endorsement, CG 20 37 07 04. In order to comply with the form industry documents, both endorsements are required.
More importantly, coverage under the CG 20 10 now excludes coverage for injuries or damage after work is completed or put to its intended use, requiring an additional endorsement for completed operations coverage. (CG 20 37 07 04). Both the AIA and ConsensusDOCS insurance provisions require completed operations coverage. An important issue for construction contractors is whether the additional insured endorsement covers completed operations. The owner or contractor who seeks an additional insured endorsement generally anticipates it will receive coverage for claims that arise during the project as well as for claims that arise after substantial completion, but not all endorsements provide both types of coverage. Courts that have considered this language found no problem restricting coverage available to the additional insured through the period of ongoing operations. However, these courts have found that the additional insured endorsement ends once that the named insured completes work on the project at issue.
Another additional insured endorsement implicated in construction matters is CG 20 07 for architects and engineers. This endorsement automatically adds as an additional insured any architect, engineer, or surveyor hired by the named insured for liability caused by the named insured. This endorsement specifically excludes injury or damage arising from the architect’s or engineer’s professional liability in preparing plans and specifications or other architectural or engineering activities. The endorsement protects an architect or engineer from bodily injury or property damage claims occurring at a job site when the injury was caused, in whole or in part, by the acts or omissions of the named insured (typically an owner or general contractor).
V. “Other Insurance”
An issue that arises on projects with significant claims is the priority of coverage between the carrier for the general contractor and carriers under which the general contractor is an additional insured. Priority between policies is governed by the “other insurance” clauses in the competing policies. Usually, it is expected by the up-stream parties that their own coverage would be excess to coverage it is receiving on an additional insured basis, which it would consider primary. Typically, CGL policies have language that makes it excess to coverage the insured receives as an additional insured. If this language is not in place in the policy, then the party’s own insurer and the insurer treating the party as an additional insured typically are obligated to provide coverage on a pro-rata basis.
VI. Coverage for “Your Work”
Standard CGL policy language typically excludes coverage for property damage to “your work” (the work of the insured), arising out of operations of the named insured. However, there is usually language accompanying this exclusion which indicates it does not apply if the damaged work was performed by a subcontractor. This exclusion is designed to exclude coverage for defective workmanship of the named insured which causes damage to the work itself.
This exclusion is intended to preclude coverage under the CGL for the contractor’s failure to conform to the contractual requirements. This is considered a business risk of the insured to perform their contract properly. However, some states have allowed coverage for damage caused to the work itself due to faulty workmanship of subcontractors. The question has focused on whether the particular state law defines defective work of a subcontractor as an “occurrence.”
In those states allowing coverage for these types of claims, courts have found that the faulty work was performed without any intention or design to create problems could lead to finding it was a covered occurrence. As a result, the insurance industry has responded and issued an endorsement: CG 22 94 10 01, which basically eliminates the subcontractor exclusion and returns the policy to one without coverage for damage caused by subcontractor work. However, some states have taken this matter into their own hands, and mandate coverage for these claims. As an example, Colorado Revised Statutes 10-4-110.4 and 13-20-808 requires courts to presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is a covered “accident” unless the property damage is intended and expected by the insured.
VII. “Additional Insured” Loophole
As we saw above, while most states prohibit enforcement of broad or intermediate form indemnity language in construction contracts with “anti-indemnity” statutes, the great majority of states allow parties to require insurance coverage with serves the same purpose of the very indemnity clauses it strikes down. This phenomenon is referred to as the “Additional Insured Loophole,” a gap in the anti-indemnity statutes that allows broad and intermediate form indemnity, if it is provided through the contract’s insurance provisions instead of the indemnity language.
However, through efforts of organizations like the American Subcontractors Association, (ASA), a few states have started to close this loophole, and now prohibit a party from requiring another party to name it as an additional insured under a policy of insurance which would provide broad form coverage. One such state is Oregon, who enacted a statute, Oregon Revised Statutes Section 30.140 (2009), upheld as constitutional by the Oregon Supreme Court in Walsh Construction Co. v. Mutual of Enumclaw, 338 Or. 1 (2005), which reads:
“Except to the extent provided under subsection (2) of this section, any provision in a construction agreement that requires a person or that person’s surety or insurer to indemnify another against liability for damage arising out of death or bodily injury to persons or damage to property caused in whole or in part by the negligence of the indemnitee is void.”
Only a few states have enacted legislation to attempt to close this additional insured loophole (see Kansas, Montana, New Mexico, Oklahoma and Oregon).